Washington 2023 legislative report, week 3

By Diana Carlen
WAWG Lobbyist

Sunday marked the 21st day of the 2023 Legislative Session and completion of the third week of the session. Committees are still holding hearings on new bills as well as scheduling bills for executive action, which is the action of voting bills out of policy and fiscal committees. Bills are continuously being revised as they move through the legislative process. As of Sunday, over 1,300 bills have been introduced. Three weeks remain until the first legislative deadline, Feb. 17, when all policy bills must be voted out of their policy committee to remain alive.

Discussions continue to ensure agriculture is exempt from carbon price

As reported last week, agriculture is paying a carbon price on fuel even though it is exempt from the provisions of the Climate Commitment Act (CCA). On Jan. 1, the CCA went into effect, which establishes a cap-and-trade program that places a cap on emissions from industries that emit over 25,000 metric tons of carbon per year. The CCA specifically exempted agriculture from on-highway and special fuel use. However, the Department of Ecology has not established a mechanism for agriculture to exercise this exemption.

This week, agricultural representatives met both with Ecology staff and the Ecology director to discuss this problem. Ecology also released interim guidance, mostly addressed at the maritime industry who also has an exemption. Unfortunately, the guidance issued by Ecology does not fix the problem. The guidance document can be found here.

It is becoming evident that legislation to address this issue may be needed. Lobbyists from the agriculture and business communities have been meeting with key legislators to discuss what a legislative fix would look like.

In the meantime, it is recommended that farmers maintain all their invoices and records of fuel sales used for agricultural purposes while this issue is being sorted out.

Riparian bill unlikely to pass out of committee in current form

Governor request legislation to set up a new voluntary riparian grant program is unlikely to move out of the House policy committee in its current form. The chair and sponsor, Rep. Mike Chapman, has released a new bill for stakeholders to review. The new bill fixes the overly broad title of the original bill. It also removes controversial language of the original bill stating that two Fish and Wildlife manuals are considered the best available science. Chair Chapman plans to hear the new bill the week of Feb. 6.

Hearing held on food processor B&O tax incentives

On Jan. 23, the Senate Agriculture, Water, Natural Resources and Parks Committee held a hearing on legislation (SB 5277) extending three B&O tax preferences for dairy, fruit and vegetable and seafood processing for products produced in Washington and exported out of the state for sale. This is very important to food manufacturers in Washington state because it exempts their sales outside of the state from the B&O tax.

The Joint Legislative Audit Review Committee recently reviewed and recommended extending these important preferences, which noted that the industry continued to outperform the overall manufacturing sector in both jobs and wages.

The bill was also supported by agriculture, the wine industry and the Association of Washington Business. There was no opposition to the bill. The bill was passed out of the policy committee on Jan. 26 and has been referred to the Senate Ways and Means Committee.

Washington State Supreme Court hears oral argument on capital gains tax

Last week, oral arguments were held at the Washington State Supreme Court over the constitutionality of Washington’s capital gains tax.

The challenge began during the 2021 session when the Legislature narrowly passed a measure imposing a 7% tax on the sale of stocks, bonds and other high-end assets in excess of $250,000 for both individuals and couples. The tax was projected to bring in $415 million this year — the first year the state would collect money from the tax. The case is before the Washington State Supreme Court after Attorney General Bob Ferguson appealed a March 2022 Douglas County Superior decision overturning the tax.

At the center of the lawsuit is the disagreement over whether the capital tax is an income tax or an excise tax. If it is found to be an income tax, it would violate the state constitution.

Although the State Supreme Court has allowed the state to begin collecting the tax while the appeal is underway, given the drastic revenue impact the challenged tax would have, the decision will have an unquestionable impact on the state’s yet-to-be-decided budget. It is unclear when the Supreme Court may rule on the case, although it is anticipated the decision may be expedited given its importance.

Legislature weighs margins tax

A hearing was held last week on legislation to replace the state’s B&O tax with a margins tax. Senate Bill 5482 is sponsored by Sen. Noel Frame (D-Seattle).

The margin tax proposal comes from Washington’s Tax Structure Workgroup. The workgroup, composed of legislators, agencies and local government representatives, was pulled together in 2017 to identify options to make the Washington state tax code more fair, adequate, stable and transparent.

One of the recommendations of the workgroup was to replace the current B&O tax system with a margin tax. Under the margin tax, businesses are taxed on their margin, which is calculated as gross income minus the greater of four deductions. Of particular interest, under the proposal, all current deductions, exclusions and exemptions are eliminated. An overview of the margins tax published by the workgroup can be found here.

During the public hearing, a number of stakeholders including tribes, labor, ports and many business organizations testified opposed to the proposal. While testifiers thanked the bill’s sponsor and the Tax Structure Workgroup for their extensive work on the proposal and recognized current frustrations with B&O tax, many did not feel they had adequate time to comprehend the effects the legislation would have. Further, several groups noted they saw members’ tax rates increase significantly when they calculated the tax and asked for a full cost benefit analysis of the proposal.

A calculator created by the Tax Structure workgroup can be found here. The calculator allows businesses to estimate the impact the proposal on their tax liability.

This would be a significant change in tax policy. With the level of opposition and complexity in changing the tax system, it is not expected to move forward this year. However, discussions on this idea are likely to continue, and businesses need to understand how they will be personally impacted if this proposal gets traction.

Other notable bills that saw action last week:

  • WA Food & Agricultural Products (SB 5341), sponsored by Ron Muzzal (R-Oak Harbor), would direct the Washington State Department of Agriculture (WSDA) to establish an advisory committee of food production organizations to submit recommendations concerning a voluntary, location-based program to brand and promote local food and agricultural products in Washington. Following the submission of such a report, the legislation allows the WSDA director to adopt rules necessary to implement the program. The proposal was supported and requested by WSDA.
  • Family Farm Permit Transfers (HB 1285), sponsored by Rep. Keith Goehner (R-Dryden), would expand the area that family farm water right permits could be transferred to include a limited area of more intensive rural development and a master planned resort. The bill was heard in the House Agriculture and Natural Resources Committee.
  • Musculoskeletal Injuries (SB 5217), sponsored by Sen. Manka Dhingra (D-Redmond), would repeal the law prohibiting the Department of Labor and Industries (L&I) from adopting rules related to ergonomics or musculoskeletal disorders. The bill would then allow L&I to adopt rules for certain risk classes of workers, so long as the department did not take up more than one set of rules for an industry per year. The Senate Labor & Commerce Committee heard the bill this week. AWB and other business groups are strongly opposed to this bill.
  • Nuclear Reactor Technology (SB 5129), sponsored by Sen. Drew MacEwen (R-Union), received positive feedback from business and labor testifiers this week. The bill would add nuclear reaction technology under the State Energy Strategy and directs Commerce to maximize federal and other nonstate funding for the management of spent nuclear fuel.
  • Climate Change Planning (SB 5203/HB 1181), sponsored by Rep. Davina Duerr (D-Bothell) in the House, and its companion legislation, sponsored by Sen. Liz Lovelett (D-Anacortes) in the Senate, was requested by the Office of the Governor. The proposal amends the Growth Management Act to incorporate goals and provisions related to climate change. The House version of the bill was passed out of the House Local Government Committee last week.
  • Renewable Energy Workforce (HB 1194), sponsored by Rep. Mark Klicker (R-Walla Walla), would establish a joint clean and renewable energy workforce training center to educate and train the workforce for energy transition. As a means of funding, the proposal imposes a state excise tax on a solar or wind farms that generate five megawatts or more at a rate of $1 per megawatt hour. A county may also impose a county excise tax on a solar or wind farms that generate 5 megawatt hours or more at a rate of $1 per megawatt hour. The bill would repeal the sales and use tax exemption for machinery and equipment used in generating certain types of electricity. The Postsecondary Education & Workforce Committee heard the bill.
  • Wage Replacement (SB 5109), sponsored by Sen. Rebecca Saldaña (D-Seattle), creates a wage replacement program for workers who are unemployed and not eligible for the state and federal unemployment insurance. The bill raises several questions for employers regarding how workers may be rehired and how it may cooperate with federal regulations. The bill received a public hearing in the Senate Labor & Commerce Committee.
  • Wage Complaints (HB 1217), sponsored by Rep. Lillian Ortiz-Self (D-Mukilteo), allows the L&I to demand interest on wages owed when a wage complaint is filed against an employer. The bill also requires L&I to establish a task force with the goal of evaluating strategies to help workers recover wages. A public hearing was held in the House Labor & Workplace Standards Committee.